IASB Staff Paper March 2015 - IFRS · March 2015 Effect of Board redeliberations on DP A Review of the Conceptual Framework for Financial Reporting This paper is not an official pronouncement

IASB Staff Paper March 2015

Effect of Board redeliberations on DP A Review of the Conceptual Framework for Financial Reporting

This paper is not an official pronouncement of the IASB. The technical staff of the IFRS Foundation have prepared it to summarise tentative decisions made by the IASB at its public

meetings. Those tentative decisions are reported in IASB Update. Official pronouncements of the IASB, including Discussion Papers, Exposure Drafts, IFRSs and Interpretations are

published only after it has completed its full due process, including appropriate public consultation and formal voting procedures.

About this staff paper

This staff paper updates the proposals in the Discussion Paper A Review of the Conceptual Framework for Financial Reporting to reflect the IASB’s tentative decisions up to the end of March 2015.

At its January 2015 meeting the IASB substantially completed its redeliberations on the Discussion Paper A Review of the Conceptual Framework for Financial Reporting. In March 2015 the IASB discussed issues that have arisen in drafting the Conceptual Framework Exposure Draft.

All tentative decisions made will be exposed for public comment in an Exposure Draft of a revised Conceptual Framework.

EFFECT OF BOARD DELIBERATIONS

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Summary of the Discussion Paper A Review of the Conceptual Framework for Financial Reporting

This table shows how the tentative decisions made by the IASB would affect the proposals in the DP A Review of the Conceptual Framework for Financial Reporting.

Proposals in the Discussion Paper Tentative decisions for the Exposure Draft

Timetable, scope and general approach

The IASB has decided to build on the existing Conceptual Framework – updating,

improving and filling in gaps rather than fundamentally reconsidering all aspects of the

Conceptual Framework.

The Conceptual Framework deals with financial reports. This Discussion Paper focuses

on financial statements, which are one form of financial report. In order to complete a

revised Conceptual Framework on a timely basis, the IASB does not plan to address in

this project other forms of financial reports, such as management commentary, interim

financial reports, press releases and supplementary material provided to analysts.

The IASB aims to finalise a revised Conceptual Framework in 2015.

On 24 April 2014 the IASB tentatively approved the proposed strategy for redeliberation

of the Conceptual Framework. For most areas the suggestions in the Discussion Paper will

be developed in the light of responses to the Discussion Paper.

The IASB also tentatively approved the timetable for the redeliberations. The IASB aims to

issue an Exposure Draft of a revised Conceptual Framework in the second quarter of 2015.

On 23 October 2014 the IASB reviewed the due process steps that the IASB has taken in

preparation for the publication of the Conceptual Framework Exposure Draft. All IASB

members confirmed that they are satisfied that the IASB has undertaken sufficient due

process steps and therefore instructed the staff to start the balloting process. In addition, the

IASB tentatively decided that there should be a comment period for the Exposure Draft of

150 days.

Section 1—Introduction

Purpose and status

The IASB’s preliminary views on the purpose and status of the Conceptual Framework

are as follows:

(a) the primary purpose of the revised Conceptual Framework is to assist the IASB by

identifying concepts that the IASB will use consistently when developing and

revising IFRSs.

(b) the Conceptual Framework may also assist parties other than the IASB to:

(i) understand and interpret existing IFRSs; and

(ii) develop accounting policies when no Standard or Interpretation specifically

applies to a particular transaction or event.

(c) the Conceptual Framework is not a Standard or Interpretation and does not

override any specific Standard or Interpretation.

(d) in rare cases, in order to meet the overall objective of financial reporting, the IASB

may decide to issue a new or revised Standard that conflicts with an aspect of the

Conceptual Framework. In such cases, the IASB would describe the departure from

that aspect of the Conceptual Framework, and the reasons for it, in the Basis for

Conclusions on that Standard.

On 24 April 2014 the IASB discussed the purpose and status of the Conceptual

Framework. The IASB tentatively decided that:

(a) the purpose of the Conceptual Framework should be to identify the concepts that:

(i) assist the IASB to develop and revise the Standards;

(ii) assist preparers to develop accounting policies when no Standard applies to a

particular transaction, event or condition;

(iii) assist all parties to understand and interpret the Standards.

(b) the existing status of the Conceptual Framework should be retained – that is, the

Conceptual Framework is not a Standard and does not override the requirements of

specific Standards.

(c) preparers should not be restricted from applying particular aspects of the


(d) in a limited number of cases, the IASB may depart from aspects of the Conceptual

Framework. If the IASB does so, the IASB will explain the departure in the Basis

for Conclusions on the Standard in question.


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Section 2—Elements of financial statements

Definitions of assets and liabilities

The IASB believes that the definitions of assets and liabilities could be clarified. They

contain references to expected inflows or outflows of economic benefits. Some have

interpreted these references as implying that the asset or the liability is the ultimate

inflow or outflow of economic benefits, rather than the underlying resource or obligation.

To avoid misunderstandings, the IASB’s preliminary view is that it should amend the

definitions to confirm more explicitly that:

(a) an asset (or a liability) is the underlying resource (or obligation), rather than the

ultimate inflow (or outflow) of economic benefits; and

(b) an asset (or a liability) must be capable of generating inflows (or outflows) of

economic benefits. Those inflows (or outflows) need not be certain.

The IASB proposes the following definitions:

(a) an asset is a present economic resource controlled by the entity as a result of past

events.

(b) a liability is a present obligation of the entity to transfer an economic resource as a

result of past events.

(c) an economic resource is a right, or other source of value, that is capable of

producing economic benefits.

Uncertainty

The IASB’s preliminary views are:

(a) the definitions of assets and liabilities should not retain the notion that an inflow or

outflow is ‘expected’. An asset must be capable of producing economic benefits. A

liability must be capable of resulting in a transfer of economic resources.

(b) the Conceptual Framework should not set a probability threshold for the rare cases

in which it is uncertain whether an asset or a liability exists. If there could be

significant uncertainty about whether a particular type of asset or liability exists,

the IASB would decide how to deal with that uncertainty when it develops or

revises a Standard on that type of asset or liability.

(c) the recognition criteria should not retain the existing reference to probability.

On 21 May 2014 the IASB tentatively decided that:

(a) Assets should be viewed as rights, or bundles of rights, rather than underlying

physical or other objects. The IASB noted that in many cases an entity would

account for an entire bundle of rights as a single asset, and describe that asset as

the underlying object. An entity would account separately for rights within a

bundle only when needed to provide a relevant and faithful representation, at a cost

that does not exceed the benefits.

(b) The reference to future economic benefits should be placed in a supporting

definition (of an economic resource), rather than in the definitions of an asset and

of a liability.

(c) The definition of an economic resource should not include the notion of ‘other

source of value’ that was suggested in the Discussion Paper. The guidance

supporting the definition of an economic resource should confirm that the notion of

a ‘right’ is broad enough to capture any know-how that is controlled by keeping it

secret.

(d) The term ‘present’ should be retained in the definition of a liability and, as

proposed in the Discussion Paper, should be added to the definition of an asset.

(e) The phrase ‘as a result of past events’ should be retained in both the definition of

an asset and the definition of a liability.

On 21 May 2014, the IASB also discussed the role of uncertainty in the definitions of an

asset and of a liability and tentatively decided that:

(a) The definitions of assets and liabilities should not retain the notion that an inflow

or outflow needs to be ‘expected’.

(b) The definition of an economic resource should, as proposed in the Discussion

Paper, specify that an economic resource must be capable of generating economic

benefits. The term ‘capable’ indicates that the economic benefits must arise from

some feature that already exists within the economic resource. The term ‘capable’

is not intended to impose a minimum probability threshold, but rather to indicate

that, in at least some outcomes, the economic resource will generate economic

benefits.

(c) The notion ‘is capable of’ should not appear explicitly in the proposed definition of

a liability. The supporting guidance should clarify that an obligation must contain

an existing feature that is capable of requiring the entity to transfer an economic

resource.


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Other elements

This section briefly discusses how to define the main building blocks (elements) for the

statement(s) of profit or loss and other comprehensive income (income and expense), the

statement of cash flows (cash receipts and cash payments) and the statement of changes

in equity (contributions to equity, distributions of equity, and transfers between classes of

equity).

To reflect the decisions above, the draft definitions are now as follows:

(a) an asset is a present economic resource controlled by the entity as a result of past

events.

(b) a liability is a present obligation of the entity to transfer an economic resource as a

result of past events.

(c) an economic resource is a right that is capable of producing economic benefits.

On 21 January 2015 the IASB tentatively decided to replace the term ‘is capable of’ with

the term ‘has the potential to’ in the definition of an economic resource. This change is

not intended to change the meaning of the definition of an economic resource. The

Exposure Draft will define an economic resource as follows:

An economic resource is a right that has the potential to produce economic

benefits.

See section 4 below for the IASB’s discussion of how to decide whether to recognise an

asset or liability if it is uncertain whether the asset or liability exists, or if it is unlikely

that future flows of economic benefits will occur.

On 21 May 2014 the IASB tentatively decided that the Conceptual Framework should

continue to define income and expenses by reference to changes in assets and liabilities.

The IASB noted that the approach to defining income and expenses does not

predetermine which assets and liabilities should be recognised, how they should be

measured and how income and expenses should be aggregated, analysed and presented.

For decisions on these matters, the IASB would continue to consider the nature of the

information that would result in the statement of financial position, and also in the

statement(s) of profit or loss and other comprehensive income.

On 19 November 2014 the IASB tentatively decided that:

(a) income should be defined as increases in assets or decreases in liabilities that result

in increases in equity, other than those relating to contributions from equity

participants; and

(b) expenses should be defined as decreases in assets or increases in liabilities that

result in decreases in equity, other than those relating to distributions to equity

participants.

The IASB also tentatively decided that the discussion of income and expenses in the

elements chapter of the existing Conceptual Framework should be amended as follows:


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(a) the discussion about presentation of income and expenses should be moved to the

presentation and disclosure chapter;

(b) the Conceptual Framework should no longer contain references to ordinary

activities; and

(c) the discussion of income should not refer to revenue and gains, and the discussion

of expenses should not refer to expenses and losses. The Basis for Conclusions

should explain that the removal of these terms is not intended to restrict the

definitions of income and of expenses. The elements chapter should not define

distinct categories of income and expenses, but could include examples of different

types of income and expenses.

The IASB also noted that it believes that the tentative decisions it has already taken are

sufficient to ensure that the revised Conceptual Framework will adequately explain the

role of matching in IFRS, and will not conflict with IFRS 15 Revenue from Contracts

with Customers.

On 24 July 2014 the IASB tentatively decided that the Conceptual Framework should

not define elements for the statement of changes in equity and for the statement of cash

flows. Thus, the only elements would continue to be assets, liabilities and equity, and

income and expenses.


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Section 3—Additional guidance to support the asset and liability definitions

Section 3 considers areas in which the IASB could add further guidance to the

Conceptual Framework to support the revised definitions of an asset and a liability.

Section 3 suggests the following:

(a) to support the definition of an asset, guidance should be provided on:

(i) the meaning of ‘economic resource’; and

(ii) the meaning of ‘control’.

(b) to support the definition of a liability, guidance should be provided on:

(i) the meaning of ‘transfer an economic resource’;

(ii) constructive obligations; and

(iii) the meaning of ‘present’ obligation.

(c) to support both definitions, guidance should be provided on:

(i) reporting the substance of contractual rights and contractual obligations; and

(ii) executory contracts.

For constructive obligations, the IASB’s preliminary view is that the existing definition

of a liability—which encompasses both legal and constructive obligations—should be

retained and more guidance should be added to help to distinguish constructive

obligations from economic compulsion.

The discussion on the meaning of present obligation notes that a present obligation arises

from past events. An obligation can be viewed as having arisen from past events if the

amount of the liability will be determined by reference to benefits received, or activities

conducted, by the entity before the end of the reporting period. However, it is unclear

whether such past events are sufficient to create a present obligation if any requirement to

transfer an economic resource remains conditional on the entity’s future actions. The

discussion identifies three different views that the IASB could use as a starting point in

developing guidance for the Conceptual Framework:

(a) View 1: a present obligation must have arisen from past events and be strictly

unconditional. An entity does not have a present obligation if it could, at least in

theory, avoid the transfer through its future actions.

On 19 June 2014 the IASB tentatively decided that the Conceptual Framework should

include:

(a) guidance on economic resources, based on paragraph 3.5 of the Discussion Paper,

but avoiding excessive detail; and

(b) guidance on economic benefits, broadly consistent with the guidance in paragraph

3.6 of the Discussion Paper, and paragraph 35 of IFRS 15 Revenue from Contracts

with Customers.

The IASB also tentatively decided that the purpose of depreciation and amortisation is to

depict consumption of the economic resource that constitutes an asset.

In addition, the IASB tentatively decided that the Conceptual Framework should include

concepts explaining the nature of the assets and liabilities in executory contracts. It

should state that:

(a) an enforceable executory contract contains a right and an obligation to exchange

economic resources (or to pay or receive the difference in values between two

economic resources if the contract will be settled net). The combined right and

obligation would constitute a single asset or liability; and

(b) if an entity enters into a forward contract to purchase a resource at a future date,

the entity’s asset is normally its right to buy the underlying resource, not the

underlying resource itself. However, in some circumstances the terms of a forward

contract to purchase a resource may give the purchaser control of that resource. In

such circumstances, the purchaser should identify both an asset (the underlying

resource that it already controls) and a liability (its obligation to pay for the

resource). In these circumstances, the contract is not executory: the seller has

substantively performed its obligations.

The IASB tentatively decided that the Conceptual Framework should not address the

measurement of executory contract assets and liabilities. Instead, the IASB should apply

the general measurement concepts in the Conceptual Framework when specifying

requirements for particular types of executory contract within the applicable Standard.

The IASB noted that many existing Standards implicitly apply the same measurement

bases for executory contract assets or liabilities as they specify for the assets or liabilities

that arise when one of the parties subsequently performs its obligations. The result is that

many executory contract assets and liabilities are measured at zero (and hence are not

recognised) unless the contract is onerous.


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(b) View 2: a present obligation must have arisen from past events and be practically

unconditional. An obligation is practically unconditional if the entity does not have

the practical ability to avoid the transfer through its future actions.

(c) View 3: a present obligation must have arisen from past events, but may be

conditional on the entity’s future actions.

The IASB has tentatively rejected View 1. However, it has not reached a preliminary

view in favour of View 2 or View 3.

On 24 July 2014 the IASB discussed the meaning of present obligation and tentatively

decided that an entity has a present obligation to transfer an economic resource as a

result of past events if both:

(a) the entity has no practical ability to avoid the transfer; and

(b) the amount of the transfer is determined by reference to benefits that the entity has

received, or activities that it has conducted, in the past.

The IASB noted that it will need to consider what ‘no practical ability’ means for

transactions within the scope of particular Standards it develops or amends. However,

the Conceptual Framework should clarify that the fact that an entity intends to make a

transfer or that the transfer is probable is not sufficient to conclude that the entity has no

practical ability to avoid the transfer. The IASB tentatively decided that the Conceptual

Framework should include the following general guidance:

(a) Most obligations arise from contracts, legislation or some other operation of the

law. In the absence of legal enforceability, an entity has no practical ability to

avoid transferring an economic resource if its customary practices, published

policies or specific statements create a valid expectation in another party that the

entity will transfer the resource to (or on behalf of) that other party. In such

situations, the entity has a constructive obligation to transfer the resource.

(b) In some situations, an entity might be required to transfer an economic resource if

it takes a particular course of action in the future, such as conducting particular

activities or exercising particular options within a contract. In such situations, if

the entity has no practical ability to avoid the particular course of action that would

require the transfer, and the other criterion is also met (the amount of the transfer is

determined by reference to benefits that the entity has received, or activities that it

has conducted, in the past), the entity has a present obligation.

(c) Situations in which an entity has no practical ability to avoid a particular course of

action include those in which all courses of action that avoid the transfer would

cause significant business disruption or have economic consequences significantly

more adverse than the transfer itself.

(d) An entity that prepares financial statements on a going concern basis has no

practical ability to avoid a transfer that could be avoided only by liquidating the

entity or ceasing trading.

In addition, the IASB tentatively decided that no guidance is needed in the Conceptual

Framework on the role of constrained discretion in the identification of assets.


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The IASB also discussed control and tentatively decided:

(a) not to move the requirement for control from the asset definition to the asset

recognition criteria;

(b) the definition of an asset should continue to require an economic resource to be

‘controlled’ by the entity. The definition should not be changed so it instead (or in

addition) requires the entity to have exposure or rights to the significant risks and

rewards of ownership of the resource;

(c) supporting guidance should identify exposure to the significant risks and rewards

of ownership as an indicator of control (but only one factor to consider in the

overall assessment);

(d) the terminology relating to control should be consistent with that in IFRS 10

Consolidated Financial Statements. Instead of using the term ‘risks and rewards of

ownership’, the Conceptual Framework should use wording that explains the

meaning of that term, ie ‘exposure, or rights, to variations in benefits’; and

(e) the Conceptual Framework should state that an entity controls an economic

resource if it has the present ability to direct the use of the economic resource and

obtain the economic benefits that flow from it.

In addition, the IASB tentatively decided that the Conceptual Framework should include

supporting guidance on the meaning of control, based on the guidance suggested in

paragraphs 3.26-3.32 of the Discussion Paper but:

(a) adding clarification that a component of control is the ability to prevent other

parties from directing the use of, and obtaining the benefits from, the economic

resource; and

(b) deleting some of the examples that were included in the Discussion Paper.


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Section 4—Recognition and derecognition

Section 4 discusses:

(a) recognition: when should an entity’s statement of financial position report an

economic resource as an asset or an obligation as a liability?

(b) derecognition: when should an entity remove an asset or a liability from its

statement of financial position?

The IASB’s preliminary view on recognition is that an entity should recognise all its

assets and liabilities, unless the IASB decides when developing or revising a particular

Standard that an entity need not, or should not, recognise an asset or a liability because:

(a) recognising the asset (or the liability) would provide users of financial statements

with information that is not relevant or is not sufficiently relevant to justify the

cost; or

(b) no measure of the asset (or the liability) would result in a faithful representation of

both the asset (or the liability) and the changes in the asset (or the liability), even if

all necessary descriptions and explanations are disclosed.

The existing Conceptual Framework does not address derecognition. The IASB’s

preliminary view is that an entity should derecognise an asset or a liability when it no

longer meets the recognition criteria. However, for cases in which an entity retains a

component of an asset or a liability, the IASB should determine, when developing or

revising particular Standards how the entity would best portray the changes that resulted

from the transaction. Possible approaches include:

(a) enhanced disclosure;

(b) presenting any rights or obligations retained on a line item that is different from the

line item used for the original rights or obligations, to highlight the greater

concentration of risk; or

(c) continuing to recognise the original asset or liability and treating the proceeds

received or paid for the transfer as a loan received or granted.

On 21 May 2014 the IASB tentatively decided that the Conceptual Framework should

not establish criteria that govern the recognition of an asset or liability in all

circumstances. The Conceptual Framework should instead describe factors to consider in

deciding whether to recognise an asset or liability. Those factors would include whether

the resulting information would be relevant and provide a faithful representation, and the

costs of providing information relative to the benefits. Information might not be relevant

if, for example, it is uncertain whether the asset or liability exists, if it is unlikely that

future flows of economic benefits will occur or if there is very significant measurement

uncertainty associated with the item. Agenda Paper 10B contains an initial draft

describing those factors. The IASB directed the staff to develop that description in the

light of the IASB’s discussion.

However, on 21 January 2015 the IASB tentatively decided to describe relevance,

faithful representation and the cost benefit constraint as criteria for recognition rather

than as factors to consider when deciding whether to recognise an asset or liability. This

change from factors to criteria is not intended to change the outcome of any decisions

made about recognition.

The IASB noted that its aim in revising the definitions of an asset and of a liability and

the recognition criteria was to provide more clarity, not to broaden or narrow the range of

recognised assets and recognised liabilities.

On 24 July 2014 the IASB tentatively decided that the Conceptual Framework should

describe the approaches available, and discuss what factors to consider, in deciding at the

Standards-level:

(a) how best to portray the changes that result from a transaction in which an entity

retains only a component of an asset or a liability, by either:

(i) full derecognition—ie derecognise the original asset (or liability) entirely and

recognise any retained right (or obligation) as a new asset (or liability);

(ii) partial derecognition—ie continue to recognise the component of the original

asset (or liability) that is retained and derecognise the component that is not

retained; or

(iii) continued recognition—ie continue to recognise the original asset (or

liability) and treat the proceeds received or paid for the transfer as a loan

received (or granted); and

(b) how to account for modifications of contracts.


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Section 5—Definition of equity and distinction between liability and equity elements

Section 5 discusses the definition of equity, the measurement and presentation of

different classes of equity and how to distinguish liabilities from equity instruments..

The IASB’s preliminary views are that:

(a) the Conceptual Framework should retain the existing definition of equity as the

residual interest in the assets of the entity after deducting all its liabilities.

(b) the Conceptual Framework should state that the IASB should use the definition of

a liability to distinguish liabilities from equity instruments. Two consequences of

this are:

(i) obligations to issue equity instruments are not liabilities; and

(ii) obligations that will arise only when the reporting entity is liquidated are not

liabilities.

(c) an entity should:

(i) update the measure of each class of equity claim at the end of each reporting

period. The IASB would determine when developing or revising particular

Standards whether that measure would be a direct measure or an allocation of

total equity.

(ii) recognise updates to those measurements in the statement of changes in

equity, as a transfer of wealth between classes of equity claim.

(d) if an entity has issued no equity instruments, it may be appropriate to treat the most

subordinated class of instruments as if it were an equity claim, with suitable

disclosure. Identifying whether to use such an approach, and if so, when, would be

a decision that the IASB would need to make when it develops or revises particular

Standards.

On 24 April 2014 the IASB tentatively decided that the Conceptual Framework:

(a) should keep the existing binary distinction of liabilities and equity and build on the

feedback received on the Discussion Paper to develop definitions of liabilities and

equity; and

(b) should not provide detailed guidance on how to distinguish liabilities from equity

instruments.

On 24 September 2014 the IASB discussed the role of the definitions of a liability and of

equity in distinguishing liabilities from equity claims and tentatively decided not to amend

those definitions at this time.

The IASB also tentatively decided that the Conceptual Framework should neither require

nor preclude any accounting requirements for classes of claims within equity.


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Section 6—Measurement

The IASB’s preliminary views on measurement are that:

(a) the objective of measurement is to contribute to the faithful representation of

relevant information about:

(i) the resources of the entity, claims against the entity and changes in resources

and claims; and

(ii) how efficiently and effectively the entity’s management and governing board

have discharged their responsibilities to use the entity’s resources.

(b) a single measurement basis for all assets and liabilities may not provide the most

relevant information for users of financial statements.

(c) when selecting which measurement to use for a particular item, the IASB should

consider what information that measurement will produce in both the statement of

financial position and the statement(s) of profit or loss and OCI.

(d) the relevance of a particular measurement will depend on how investors, creditors

and other lenders are likely to assess how an asset or a liability of that type will

contribute to future cash flows. Consequently, the selection of a measurement:

(i) for a particular asset should depend on how that asset contributes to future

cash flows; and

(ii) for a particular liability should depend on how the entity will settle or fulfil

that liability.

(e) the number of different measurements used should be the smallest number

necessary to provide relevant information. Unnecessary measurement changes

should be avoided and necessary measurement changes should be explained.

(f) the benefits of a particular measurement to users of financial statements need to be

sufficient to justify the cost.

On 24 April 2014 the IASB tentatively decided to build on the proposals in the

Discussion Paper, modified in the light of feedback received, rather than undertaking

further research work on measurement.

On 23 July 2014 the IASB discussed the objective of measurement and tentatively

decided that the Exposure Draft should:

(a) not define a separate measurement objective; and

(b) describe as follows how measurement contributes to the overall objective of

financial reporting:

"Measurement is the process of quantifying in monetary terms information about

the resources of an entity, claims against the entity and changes in those resources

and claims. Such information helps users to assess the entity’s prospects for future

cash flows and assess management’s stewardship of the entity’s resources."

The IASB also discussed the implications of the qualitative characteristics of useful

financial information for measurement and tentatively decided that the Exposure Draft

should:

(a) state that when the IASB selects a measurement basis, it should consider the nature

and relevance of the resulting information produced in both the statement of

financial position and the statement(s) of profit or loss and other comprehensive

income (OCI).

(b) state that:

(i) the level of uncertainty associated with the measurement of an item is one of

the factors that should be considered when selecting a measurement basis;

and

(ii) if a measurement is subject to a high degree of measurement uncertainty, that

fact does not, by itself, mean that the measurement does not provide relevant

information.

(c) not make explicit use of the term ‘reliability’ when describing the level of

measurement uncertainty associated with the measurement of an item.

(d) retain the discussion of faithful representation included in the Discussion Paper.

(e) discuss in the measurement section that a faithful representation by itself does not

necessarily result in useful information. The information provided by the

representation must also be relevant.

(f) explain the need to weigh the benefits of introducing a new or different


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Proposals in the Discussion Paper Tentative decisions for the Exposure Draft measurement basis against any increased costs or complexity. This would replace

the statement in the Discussion Paper that the number of measurement bases

should be the smallest necessary to provide relevant information.

(g) retain the discussion of necessary and unnecessary changes in measurement bases

included in the Discussion Paper.

(h) retain the discussion of the other enhancing qualitative characteristics included in

the Discussion Paper.

(i) state explicitly in the measurement section that the cost-benefit constraint is one of

the factors the IASB should consider when selecting a measurement.

On 24 July 2014 the IASB discussed cash-flow-based measurements and tentatively

decided that the purpose of cash flow-based measurement techniques is normally to

implement one of the measurement bases that will be described in the Conceptual

Framework. However, if the IASB decides in a particular Standard to use a cash flow-

based measurement technique to implement a measurement basis that is not one of those

described in the Conceptual Framework, the Basis for Conclusions on that Standard

should explain why.

The IASB also tentatively decided that the Exposure Draft should include additional

guidance on:

(a) the different approaches to dealing with uncertain cash flows;

(b) the use of discount rates. This guidance would state, among other things, that if an

entity measures an item using a cash flow-based measurement technique, and the

effect of the time value of money is significant for the cash flows associated with

that item, then the entity should discount those cash flows to reflect the time value

of money; and

(c) how to decide when the measurement of a liability should include the effect of a

reporting entity’s own credit standing.

However, on 23 October 2014 the IASB tentatively decided not to include this additional

guidance in the Exposure Draft noting that the level of detail proposed is excessive for

the description of a measurement technique in the Conceptual Framework.

On 24 September 2014 the IASB tentatively reconfirmed its decision not to develop a

single or default measurement basis.

The IASB also tentatively decided that the Exposure Draft should state that:

(a) consideration of the objective of financial reporting, of the qualitative

characteristics of useful information and of the cost benefit constraint is likely to

result in the IASB selecting different measurement bases for different assets and

liabilities;


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(b) the factors to be considered when selecting a measurement basis for an asset or

liability should include:

(i) how the asset or liability will contribute to future cash flows. This will

depend in part on the nature of the business activities being conducted.

Nevertheless, the Conceptual Framework need not (and should not) refer

explicitly to any particular business activity, such as long-term investment;

and

(ii) the characteristics of the asset or liability (for example, the nature or extent

of the variability in the item’s cash flows, the sensitivity of the value of the

item to changes in market factors or other risks inherent in the item);

(c) the relative importance of each of the factors to be considered when selecting a

measurement basis will depend upon facts and circumstances; and

(d) it may be appropriate to use one measurement basis for the statement of financial

position and a different measurement basis for the statement of profit or loss when

such an approach better reflects the nature of the business activities conducted.

The IASB also discussed the initial measurement and tentatively decided to amend the

Discussion Paper by:

(a) replacing references to the three measurement bases described in the Discussion

Paper with references to historical cost and current value;

(b) removing some Standards-level detail, to be consistent with the agreed strategy for

the measurement section;

(c) removing the statement that, for exchanges of equal value, initial measurement

issues are rarely significant; and

(d) clarifying that cost and fair value are only the same if transaction costs are

excluded from cost or are negligible.

In addition, the IASB noted that the measurement basis used on initial recognition should

be consistent with the measurement basis subsequently. The IASB tentatively decided to

clarify that this should not prevent:

(a) current values being used in some circumstances as a deemed cost on initial

measurement; and

(b) a change in measurement basis if such a change increases the relevance of the

information provided.

On 23 October 2014 the IASB tentatively decided to include in the Exposure Draft a

description and discussion of measurement bases that is based on the revised working

draft in Agenda Paper 10B.

http://www.ifrs.org/Meetings/MeetingDocs/IASB/2014/October/AP10B-Conceptual%20Framework.pdf


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On 19 November the IASB discussed transactions costs and tentatively decided that the

Exposure Draft should state that:

(a) if a measurement depicts the current value (ie fair value, fulfilment value or value

in use) of an asset or liability then that measurement should not reflect the

transaction costs of acquiring the asset or incurring the liability.

(b) if a measurement depicts the value in use of an asset, the transaction costs that

would be incurred on ultimate disposal of that asset should be deducted in

producing the measurement.

(c) if a measurement depicts the fulfilment value of a liability, the costs that would be

incurred in fulfilling that liability should be added in producing the measurement.

That measurement would not include transaction costs that would be incurred on

transferring the liability to another party or on negotiating a settlement of the

liability.

(d) the fair value of an asset (liability) is not reduced (increased) by the costs of selling

(transferring) the asset (liability). However, this does not preclude the IASB from

deciding to measure an asset at fair value less costs to sell (or a liability at fair

value plus costs of transfer), if doing so would provide users of financial

statements with information that is more relevant than a fair value measurement.

(e) if a measurement depicts the cost of an asset or liability (rather than its transaction

price), that measurement:

(i) should reflect (among other things) the transaction costs of acquiring the

asset or incurring the liability;

(ii) should not be decreased (increased) to reflect the transaction costs of

realising the asset (or settling or transferring the liability).


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Section 7—Presentation and disclosure

The IASB’s preliminary views on presentation and disclosure are that:

(a) the objective of primary financial statements is to provide summarised information

about recognised assets, liabilities, equity, income, expenses, changes in equity,

and cash flows that has been classified and aggregated in a manner that is useful to

users of financial statements in making decisions about providing resources to the

entity.

(b) the objective of the notes to the financial statements is to supplement the primary

financial statements by providing additional useful information about:

(i) the assets, liabilities, equity, income, expenses, changes in equity, and cash

flows of the entity; and

(ii) how efficiently and effectively the entity’s management and governing board

have discharged their responsibilities to use the entity’s resources.

(c) to meet the objective of disclosure, the IASB would normally consider requiring

disclosure about the following:

(i) the reporting entity as a whole;

(ii) amounts recognised in the entity’s primary financial statements, including

changes in those amounts (for example, disaggregation of line items, roll-

forwards, reconciliation);

(iii) the nature and extent of the entity’s unrecognised assets and liabilities;

(iv) the nature and extent of risks arising from the entity’s assets and liabilities

(whether recognised or unrecognised); and

(v) the methods, assumptions and judgements, and changes in those methods,

assumptions and judgements, that affect amounts presented or otherwise

disclosed.

(d) the concept of materiality is clearly described in the existing Conceptual

Framework. Consequently, the IASB does not propose to amend, or add to, the

guidance in the Conceptual Framework on materiality. However, the IASB is

considering developing additional guidance or education material on materiality

outside of the Conceptual Framework project.

(e) forward-looking information would be included in the notes to the financial

statements if it provides relevant information about existing assets and liabilities, or

about assets and liabilities that existed during the reporting period.

On 19 June 2014 the IASB tentatively decided:

(a) to reconfirm the proposal in the Discussion Paper that each Standard should have a

clear objective for disclosure and presentation requirements;

(b) to reconfirm the proposal in the Discussion Paper that the IASB should develop

disclosure and presentation requirements that promote effective communication of

useful financial information;

(c) to include in the Conceptual Framework those communication principles proposed

in the Discussion Paper that are primarily directed at the IASB and discuss how

they relate to the qualitative characteristics of useful financial information.

Specifically, the IASB tentatively decided that disclosure requirements should seek

to:

(i) promote the disclosure of useful information that is entity-specific;

(ii) result in disclosures that are clear, balanced and understandable;

(iii) avoid duplication of the same information in different parts of the financial

statements; and

(iv) optimise comparability without compromising the usefulness of the

information disclosed; and

(d) not to include in the Conceptual Framework a discussion about financial

statements in an electronic format.

The IASB also tentatively decided it would not amend the concept of materiality in

paragraph QC11 of the existing Conceptual Framework, except to clarify that the term

‘users’ in that paragraph refers to the primary users mentioned in Chapter 1 of the


On 24 July 2014 the IASB discussed the scope and content of presentation and disclosure

guidance and tentatively decided that the Exposure Draft should:

(a) not introduce the notion of ‘primary financial statements’ that had been proposed

in the Discussion Paper;

(b) state that the objective of financial statements is to provide information about an

entity’s assets, liabilities, equity, income and expenses that is useful to users of

financial statements in assessing the prospects for future net cash inflows to the

entity and in assessing management’s stewardship of the entity’s resources. As a

result, financial statements provide information about the financial position,

financial performance and cash flows of an entity;


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(c) discuss disclosures that the IASB would normally consider requiring in setting

Standards (but should not provide examples of different types of disclosures);

(d) retain the discussion of disclosure of risks and forward-looking information

proposed in the Discussion Paper. In particular:

(i) the IASB would normally consider requiring disclosures about the nature and

extent of risks arising from the entity’s assets and liabilities; and

(ii) the IASB should require forward-looking information to be included in the

notes to the financial statements only if it provides relevant information

about the assets and liabilities that existed at the end of, or during, the

reporting period;

(e) retain the guidance on classification and aggregation, offsetting and comparative

information proposed in the Discussion Paper, in particular that:

(i) in order to present information that is understandable, an entity should

classify, aggregate and disaggregate information about recognised elements

in a way that reflects similarities in the properties of the information;

(ii) offsetting items of dissimilar nature does not generally provide the most

useful information; and

(iii) comparative information is an integral part of an entity’s financial statements

for the current period because it provides relevant trend information.

On 19 November 2014 the IASB tentatively decided that the Conceptual Framework

should not comment on whether the objective of disclosure should include the provision

of information that enables a user of financial statements to recalculate the amounts

recognised in the financial statements. Rather, the IASB should consider that topic in its

Disclosure Initiative project.


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Section 8—Presentation in the statement of comprehensive income

Section 8 discusses:

(a) the purpose of the statement(s) of profit or loss and OCI; and

(b) whether the Conceptual Framework should require a profit or loss total or subtotal

and whether it should require or permit recycling.

The IASB’s preliminary views are that:

(a) the Conceptual Framework should require a profit or loss total or subtotal that also

results, or could result, in some items of income or expense being recycled; and

(b) the use of OCI should be limited to items of income or expense resulting from

changes in current measures of assets and liabilities (remeasurements). However,

not all such remeasurements would be eligible for recognition in OCI. Section 8

discusses two approaches that could be used to define which remeasurements might

be included in OCI.

On 19 June 2014 the IASB tentatively decided that the Conceptual Framework should:

(a) require profit or loss as a total or subtotal.

(b) describe profit or loss as the primary source of information about an entity’s

performance for the period but emphasise that it is not the only source of such

information. For example, items included in OCI also provide information about an

entity’s performance.

(c) describe the dual objectives for profit or loss as depicting the return that an entity

has made on its economic resources during the period, and providing information

that is helpful in assessing prospects for future cash flows. On 21 January 2015 the

IASB tentatively decided to leave this notion in the Exposure Draft but not to

describe it as the objective of profit or loss.

(d) include a rebuttable presumption that all items of income and expense should be

included in profit or loss unless the IASB concludes in a particular Standard that

including an item of income and expense—or a component of such an item—in

OCI would enhance the relevance of profit or loss as the primary source of

information about an entity’s performance for the period.

(e) state that one example when the rebuttable presumption discussed in (d) above

could be rebutted is when the IASB concludes that one measurement basis is

appropriate for an asset or a liability in the statement of financial position and

another measurement basis is appropriate for profit or loss. In such cases, the

resulting difference would be reported in OCI.

(f) include a rebuttable presumption that all items of income and expense included in

OCI should be recycled to profit or loss.

On 24 July 2014 the IASB discussed why profit or loss is the primary source of

information about an entity’s performance for the period. The IASB tentatively decided

that the Exposure Draft should:

(a) propose that the presumption for including items of income and expense in profit

or loss cannot be rebutted for items of income and expense that arise when cost-

based measures are used for assets and liabilities.

(b) propose that the presumption for including items of income and expense in profit

or loss can only be rebutted for changes in current measures of assets and

liabilities, and only if including those changes—or components of those changes—

in OCI enhances the relevance of profit or loss as the primary source of

information about an entity’s performance for the period; and


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(c) emphasise that including items of income and expense resulting from changes in

current measures of assets and liabilities—or components of those changes—in

OCI is an application of the classification, aggregation and disaggregation

principle for presentation and disclosure, which is designed to provide effective

communication of financial information and to make that information more

understandable.

On 19 March 2015 the IASB discussed terminology to be used in the Exposure Draft for

describing financial performance and tentatively decided that the Exposure Draft should

use the following terms:

(a) statement(s) of financial performance; and

(b) other comprehensive income (OCI).

In addition, the IASB discussed how to describe the treatment of related gains and losses

accumulated in OCI when an asset or liability is derecognised. It tentatively decided that

that treatment should be described in a manner consistent with commonly used notions

of ‘recycling’ or ‘reclassification’, rather than disaggregation.


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Section 9—Other issues

Chapters 1 & 3

Section 9 discusses the IASB’s approach to Chapter 1 The Objective of General Purpose

Financial Reporting and Chapter 3 The Qualitative Characteristics of Useful Financial

Information of the existing Conceptual Framework. The IASB does not intend to

fundamentally reconsider the content of these chapters. However, the IASB will make

changes to those chapters if work on the rest of the Conceptual Framework highlights

areas within those chapters that need clarifying or amending. Section 9 also discusses the

concerns that some have raised with how these chapters deal with the issues of

stewardship, reliability and prudence.

Stewardship

On 21 May 2014 the IASB tentatively decided to amend Chapter 1 of the Conceptual

Framework to increase the prominence of stewardship within the overall objective of

financial reporting. It would do this by identifying the information needed to assess the

stewardship of management as not overlapping fully with the information needed to help

users assess the prospects of future net cash inflows to the entity.

Reliability

On 21 May 2014 the IASB tentatively decided:

(a) not to replace the qualitative characteristic of faithful representation with

reliability;

(b) not to include reference to reliability as either an additional qualitative

characteristic or an aspect of either relevance or faithful representation; and

(c) to consider in drafting whether it is possible to give greater prominence to the idea

expressed in paragraph QC16 of the existing Conceptual Framework that if the

level of uncertainty associated with an estimate is sufficiently large, that estimate

might not provide relevant information.

Prudence

On 21 May 2014 the IASB tentatively decided:

(a) to reintroduce a reference to prudence in the Conceptual Framework;

(b) to describe prudence as the exercise of caution when making judgments under

conditions of uncertainty. The exercise of prudence is consistent with neutrality

and should not allow the overstatement or understatement of assets, liabilities,

income or expenses; and

(c) to discuss in the Basis for Conclusions the significance of prudence for preparers in

preparing financial statements and for the IASB when setting Standards.


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Other aspects of Chapters 1 and 3

On 21 May 2014 the IASB discussed Chapters 1 and 3 of the Conceptual Framework

and tentatively decided:

(a) to amend Chapter 3 Qualitative Characteristics of Useful Financial Information to

explain that, when the legal form of an item is different from its underlying

economic substance, reporting that item in accordance with its legal form would

not result in a faithful representation;

(b) to make no changes to the description of the primary user group identified in

Chapter 1 The Objective of General Purpose Financial Reporting;

(c) not to elevate understandability from an enhancing qualitative characteristic to a

fundamental qualitative characteristic; and

(d) not to add a discussion of complexity to the Conceptual Framework.

Reporting entity

The IASB has not included a discussion on the reporting entity in this Discussion Paper

because the IASB has already issued a Discussion Paper and an Exposure Draft on this

topic. The IASB intends that the Exposure Draft of the Conceptual Framework will

include material on the reporting entity, based on the 2010 Exposure Draft and updated in

the light of comments received on that Exposure Draft.


(a) A reporting entity is an entity that chooses, or is required, to present general

purpose financial statements.

(b) A reporting entity need not be a legal entity, and could comprise an unincorporated

entity, a portion of an entity, or two or more entities.

(c) The Conceptual Framework should not discuss joint control and significant

influence.

(d) Generally, consolidated financial statements are more likely than unconsolidated

financial statements to provide information that is useful to more users.

(e) When an entity is required to present consolidated financial statements, that entity

may also choose, or be required, to present unconsolidated financial statements.

Those unconsolidated financial statements should disclose how users may obtain

consolidated financial statements.

(f) The Conceptual Framework should not specify which combinations of entities

could constitute a reporting entity that could legitimately prepare combined

financial statements.

In addition, the IASB tentatively confirmed that financial statements should be prepared

from the perspective of the reporting entity as a whole. This decision was reconfirmed

on 21 January 2015.


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On 19 March 2015 the IASB tentatively decided to add to the Exposure Draft more

discussion of how to establish the boundary of a reporting entity that is not a legal entity.

The discussion should provide a reminder of the need to consider the qualitative

characteristics of useful financial information.

Business model

Section 9 discusses the use of the business model concept in financial reporting—this

Discussion Paper does not define the business model concept. However, the IASB’s

preliminary view is that financial statements can be made more relevant if it considers

how an entity conducts its business activities when it develops new or revised Standards.

On 24 July 2014 the IASB tentatively decided that the Exposure Draft should not provide

a single over-arching description of how the nature of an entity’s business activities

would affect standard-setting. Instead, the IASB should describe, for each area affected,

how consideration of an entity’s business activities would affect standard setting. The

IASB also indicated that the nature of an entity’s business activities is likely to affect

measurement, the unit of account, the distinction between profit or loss and OCI, and

presentation and disclosure. It is less likely to affect other areas covered by the


On 24 September 2014 the IASB discussed the implications of long-term investment for

the Conceptual Framework and tentatively decided that:

(a) the IASB’s tentative decisions on measurement and on profit or loss and other

comprehensive income (OCI) would provide sufficient tools so that the IASB

would be able to make appropriate standard-setting decisions should future projects

consider:

(i) how to measure the long-term investments (or liabilities) of entities whose

business activities include long-term investment; and

(ii) whether such entities should present changes in the carrying amount of those

investments (or liabilities) in profit or loss or in OCI;

(The IASB has no active or planned projects on long-term investment);

(b) no other areas of the Conceptual Framework need to include a specific reference to

reporting entities whose business activities include holding long-term investments;

(c) the Conceptual Framework contains sufficient and appropriate discussion of

primary users and their information needs, and the objective of general purpose

financial reporting, to address appropriately the needs of long-term investors in a

reporting entity; and

(d) when updated for the IASB’s tentative decisions in May 2014, the Conceptual

Framework would contain sufficient and appropriate discussion of stewardship and

prudence to address appropriately the needs of long-term investors in a reporting

entity.


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Unit of account

The IASB’s preliminary view is that the unit of account will normally be decided when it

develops or revises particular Standards and that, in selecting a unit of account, it should

consider the qualitative characteristics of useful information.

On 19 June 2014 the IASB tentatively decided that:

(a) determining the unit of account is a Standards-level decision;

(b) the Conceptual Framework should describe possible units of account; and

(c) the Conceptual Framework should include a list of factors to consider when

determining the unit of account but should not rank the priorities of the factors.

Going concern

In the Discussion Paper the IASB has identified three situations in which the going

concern assumption is relevant (when measuring assets and liabilities, when identifying

liabilities and when making disclosures about the entity).


(a) The going concern assumption should be treated as an underlying assumption.

The revised Conceptual Framework should include the current description of the

going concern assumption, except that the phrase ‘curtail materially the scale of

its operations’ should be replaced by ‘cease trading’. That wording is used in

IAS 1 Presentation of Financial Statements and IAS 10 Events After the

Reporting Period;

(b) The IASB should not provide additional guidance in the Conceptual Framework

on the going concern assumption;

(c) This project should not address:

(i) the preparation of financial statements by entities that are not going

concerns; and

(ii) disclosures about going concern.

Capital maintenance

The IASB may reconsider capital maintenance concepts if it undertakes a project on

accounting for high inflation. The IASB plans to keep the existing descriptions and

discussion of capital maintenance concepts in the revised Conceptual Framework largely

unchanged until it undertakes such a project.

On 24 April 2014 the IASB tentatively decided to leave the existing descriptions and the

discussion of capital maintenance concepts in the Conceptual Framework unchanged

unless work on the measurement section of the Exposure Draft highlights a need to discuss

the issue further.


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Transition and effective date

The summary and invitation to comment of the Discussion Paper stated that once the

IASB finalises the revised Conceptual Framework, it will start using it immediately. The

Discussion Paper did not provide any other guidance on transition or effective date.

On 24 July 2014 the IASB tentatively decided that:

(a) the IASB and the IFRS Interpretations Committee should apply the revised

Conceptual Framework immediately after its publication;

(b) a transition period of no less than approximately 18 months should be allowed for

entities that use the Conceptual Framework to develop and apply accounting

policies for a transaction, other event or condition for which no IFRS specifically

applies. Early application should be permitted; and

(c) no additional guidance on transition should be provided in the revised Conceptual

Framework. Consequently, entities would be required to apply the provisions of

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to any

changes in accounting policy arising from an application of the revised Conceptual

Framework.

Inconsistencies with existing Standards

The summary and invitation to comment of the Discussion Paper stated that a revised

Conceptual Framework will not necessarily lead to changes to existing IFRSs. Any

proposal to change an existing Standard or Interpretation would need to go through the

IASB’s normal due process (including a formal decision to add the project to the IASB’s

agenda).

On 23 October 2014 the IASB discussed a summary of potential inconsistencies between

the existing Standards and the Conceptual Framework Exposure Draft and tentatively

decided that the Basis for Conclusions accompanying the Exposure Draft should:

(a) explain the implications of its proposed changes to the Conceptual Framework

including that the Conceptual Framework does not override existing Standards or

Interpretations and that the IASB will not necessarily change existing Standards or

Interpretations as a result of changes that it makes to the Conceptual Framework;

and

(b) describe potential inconsistencies between the existing Standards and the

Conceptual Framework Exposure Draft.

The IASB also tentatively decided that the Exposure Draft should include proposals to

replace the existing references to the Framework for the Preparation and Presentation of

Financial Statements (or to the Framework) with references to the Conceptual

Framework for Financial Reporting (or to the Conceptual Framework) in those

Standards and Interpretations that will not have been superseded before the revised

Conceptual Framework becomes effective.


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In addition, the IASB tentatively decided that, until the revised Conceptual

Framework is finalised, it will not consider developing proposals:

(a) to amend IAS 1 or IAS 8 to align these Standards with the proposed revised

Conceptual Framework; or

(b) to clarify the meaning of the term ‘reliability’ in existing Standards.

Documents

IASB Staff Paper March 2015 - IFRS · March 2015 Effect of Board redeliberations on DP A Review of the Conceptual Framework for Financial Reporting This paper is not an official pronouncement